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Petterson v Chan Mow & Co Ltd [2023] WSCA 7 (28 November 2023)

IN THE COURT OF APPEAL OF SAMOA
Petterson v Chan Mow & Company Limited [2023] WSCA 7 (28 November 2023)


Case name:
Petterson v Chan Mow & Company Limited


Citation:


Decision date:
28 November 2023


Parties:
DAVID ROSS PETTERSON (Appellant) v CHAN MOW AND COMPANY LIMITED (Respondent)


Hearing date(s):
22 November 2023


File number(s):
CA06/23


Jurisdiction:
Civil


Place of delivery:
Court of Appeal of Samoa, Mulinuu


Judge(s):
Justice Fisher
Justice Blanchard
Justice Young


On appeal from:
Supreme Court of Samoa, Mulinuu


Order:
The appeal is dismissed. We reserve leave to apply as to the basis on which costs should be assessed and if necessary, quantum and any other ancillary issue that may arise.


Representation:
B Gustafson & S Ainuu for the Appellant
M Kersey, S Jones & T Lamb for the Respondent


Catchwords:
Company in liquidation - removal of liquidator.


Words and phrases:


Legislation cited:
Companies Act 2001 ss. 16; 16(a); 17; 18; 22(a); 65; 70; 71; 213; 218; 238(1)(b); 244(1)(c).


Cases cited:
AMP Music Box Enterprises Ltd v Hoffman [2002] BCC 996 (High Court of England and Wales, Chancery Division);
Australian Securities and Investments and Commission v Franklin (2014) 233 FCR 204 (Federal Court of Australia);
Clarkson v Whangamata Metal Supplies Ltd [2007] NZCA 590; [2008] 3 NZLR 31 (New Zealand Court of Appeal);
Hungerfords v Walker (1989) 171 CLR 123 (High Court of Australia);
Re Biposo Pty Ltd (1995) 17 ASCR 730 (Supreme Court of New South Wales);
Saxmere Co Ltd v Wool Board Disestablishment Co Ltd [2009] NZSC 72; [2010] 1 NZLR 35 (Supreme Court of New Zealand);
Sempra Metals Ltd (formally Metallgesellschaft Ltd) v Commissioners of Inland Revenue [2007] UKHL 34; [2007] 3 WLR 354 (House of Lords);
Yan v Mainzeal Property and Construction Ltd (in liquidation) [2023] NZSC 113 (Supreme Court of New Zealand).


Summary of decision:

CA06/23


IN THE COURT OF APPEAL OF SAMOA


BETWEEN:


DAVID ROSS PETTERSON


Appellant


A N D:


CHAN MOW AND COMPANY LIMITED


Respondent


Coram: Justice Fisher
Justice Blanchard
Justice Young


Hearing: 22 November 2023


Counsel: B Gustafson & S Ainuu for the Appellant
M Kersey, S Jones & T Lamb for the Respondent


Judgment: 28 November 2023


JUDGEMENT OF THE COURT

The appeal

  1. On 9 September 2021, Progressive Insurance Co Ltd (“Progressive”) was placed in liquidation pursuant to a resolution of its sole shareholder, Decatur Corporation (“Decatur”), a Marshall Islands company. Decatur appointed the appellant, David Ross Petterson, as the liquidator. Mr Petterson is a very experienced insolvency practitioner based in New Zealand.
  2. As at 9 September 2021, Mr Murray Drake was the only director of Progressive. Mr Drake and associated interests own and control (albeit indirectly) Decatur. Mr Drake is a lawyer. He, along with his wife, Ruby Drake, and their daughter, Kristen Kruse, practise in partnership in Apia as Drake & Co.
  3. Mr Drake and Mr Petterson have known each other since 1989. As well, there have also been business links between Mr Petterson and members of Mr Drake’s family, Ms Kruse and his son, Justin Drake, who is a lawyer and merchant banker.
  4. Chan Mow & Co Ltd (CML), a substantial creditor of Progressive, was concerned as to Mr Petterson’s impartiality. As a result of these concerns, it sought Mr Petterson’s removal as liquidator.
  5. CML was successful before the Chief Justice who, in a judgment delivered on 21 April 2023, removed Mr Petterson as liquidator and replaced him with two other insolvency practitioners, Neale Jackson and Natalie Burrett.
  6. Mr Petterson now appeals.
  7. The appeal raises some legal issues. These include the location in the Companies Act 2001 (the Act) of the relevant power of the Supreme Court to remove a liquidator and the test to be applied when doing so. Also contextually relevant are the legal duties of directors and how claims for breach of such duties can be pursued. That said, the key issue in the case is factual: whether Mr Petterson’s connections with Mr Drake and members of his family, together with his conduct of the liquidation and litigation, cast a shadow over his impartiality that is sufficient to warrant his removal.

An overview of the facts

  1. In 1984, Chandra Finance Ltd (Chandra) was formed. Its shares were held as to two thirds by the Chan Mow family and, as to one third, by Mrs Drake.
  2. In 1993, Progressive was established. Chandra had, indirectly, the major interest in Progressive but initially there were also other participants. Over time, the other participants dropped out so that by 2016 Chandra owned, still indirectly, all shares in Progressive.
  3. Progressive provided insurance in Samoa and American Samoa. It had offices and staff in both jurisdictions. Mr Drake and Patrick Chan Mow were directors of Progressive from its establishment. Mr Chan Mow’s participation in the governance of Progressive appears to have been limited. He ceased being a director on 26 July 2016. From 2018, Mr Drake and Mr Greg Duffy, who ran the American Samoa office, were the only directors of Progressive. Mr Duffy ceased being a director in 2021, leaving Mr Drake as the only director when Progressive was placed in liquidation.
  4. Progressive operated largely on a cash-in cash-out (or as Mr Petterson was later to put it, a “pool of premiums”) basis. It had no, or at best limited, reserves. This meant that its ability to meet significant claims was dependent on reinsurance arrangements.
  5. The last financial statements prepared for Progressive were for the financial year ending 30 June 2012. These accounts reveal balance sheet insolvency. As well, by 2011 Progressive had incurred liabilities, some unquantified, with its reinsurer. It was not in a position to meet those liabilities from its usual trading income.
  6. On 26 July 2016, CML’s wholesale premises were substantially damaged by fire. CML’s substantial losses gave rise to claims under a number of policies issued by Progressive. As will have been noticed, it was on the same day that Mr Chan Mow ceased being a director of Progressive. He says that this occurred without his knowledge.
  7. Between 14 March and 5 September 2017, CML received part-payments (or in one case an offset in relation to premiums) totalling WST4.7 million towards its losses. By then there were settlement agreements fixing quantum in relation to all claims other than one for business interruption. The total payable under the settlements was WST9.3 million. However, from September 2017, Progressive was unable to make any further substantial payments. It was in this context that CML agreed in October 2017 to accept payment of the balance owed to it (around WST4.6 million) in instalments of WST50,000 a month. As it happened, however, Progressive made only five further payments, each of WST25,000, the last of which was in January 2018.
  8. On 19 June 2018, the last of CML claims – the one for business interruption – was settled. The overall liability of Progressive to CML under the quantification of loss settlement agreements was WST9.7 million of which CML had received by this stage only WST4.8 million in payments or offsets, leaving a balance owing of WST4.9 million.
  9. For reasons largely associated with Progressive’s delays in paying what it owed, relationships between the Chan Mow family and the Drakes became strained. In March 2020, in a partial resolution of the associated difficulties, the Chan Mow family sold their two-thirds interest in Chandra to the Drakes. This meant that the Drakes owned, indirectly, all of the shares in Progressive. Around this time, the shareholding of Progressive changed with Decatur becoming the sole shareholder. As far as we can tell, Decatur is owned by Chandra, which in turn is owned by Corden Holdings Ltd of which Mr Justin Drake is the sole director and which is owned by a Marshall Islands company to which we will refer as Paco (MI).
  10. In June 2021, CML issued proceedings against Progressive seeking WST4.9 million as the unpaid balance payable under the settlement agreements. Those proceedings were stayed by the 9 September 2021 appointment of Mr Petterson as liquidator of Progressive.
  11. By letter of 21 September 2021, CML objected to the appointment of Mr Petterson as liquidator. Mr Petterson insisted on remaining in office and an application for his removal followed.

The legal framework

  1. As we have explained the case comes down to what are primarily factual issues. However, an understanding of these issues requires a reasonable grasp of the legal framework within which they fall to be assessed. So, it is helpful to discuss that framework at this point in these reasons.

Redress for wrongful trading

  1. Of moment to some of the disputes that have arisen over Mr Petterson’s appointment and conduct as liquidator are the steps that could be taken to pursue Mr Drake, or other directors, for wrongful trading.
  2. Primarily relevant to this are ss 65, 70 and 71 of the Act. They materially provide:

In the case of a company that is insolvent, “the interests of the company” will be assessed having regard to the interests of the creditors.[1]

  1. What is important to note for present purposes is that claims in relation to wrongful trading can be brought either by the liquidator of Progressive in the name of the company pursuing what would be company claims for loss under ss 65 and 70 or by creditors directly, and in respect of their own losses, under s 71.

Disqualification from holding office as a liquidator

  1. Section 213 and cl 1 of Schedule 14 of the Act specify circumstances that operate as disqualifications from holding office as liquidator. Clause 1(d) disqualifies:
  2. CML originally understood that Mr Petterson was a director of Paco (MI). If so, he would have been disqualified as Paco (MI) was a “related company” in respect of Progressive. This was originally the primary basis on which CML sought his removal. It is not surprising that CML thought this because, as we will explain later, Mr Petterson had been a director of a Mauritius company with the same name. However, Mr Petterson has never been a director of Paco (MI).

Location of power to remove a liquidator

  1. Relevant to whether the Court had power to remove Mr Petterson as liquidator are cls 16, 17, 18 and 22(a) of Schedule 13 to the Act:
  2. In the judgment under appeal, the Chief Justice concluded that the scope of cl 18 is not controlled by its heading and the word “disqualified” is not confined to disqualification under s 213 and cl 1 of Schedule 14, of the Act. On his approach, cl 18 permits the removal of a liquidator who is disqualified in the different sense of being insufficiently independent to appropriately serve as liquidator.
  3. A liquidator who, under the principles of law we are about to discuss, is insufficiently impartial to be the liquidator of a company can fairly be said to not comply with a relevant “rule of law” for the purposes of cl 16(a). Clause 18 applies in the case of a liquidator who “is or becomes disqualified to become or remain a liquidator”. In the context of the overall scheme of cls 16 – 18, it is sensible to construe “disqualified” as encompassing those who are disqualified for lack of independence and therefore as not confined to those who are disqualified under cl 1 of Schedule 14.
  4. Clause 22(a) provides a second source of a power to remove Mr Petterson.
  5. At the hearing Mr Gustafson sensibly conceded that the grounds on which a liquidator may be renewed are not confined to breach of court order or disqualification under cl 1 of Schedule 14. He accepted that there was jurisdiction to remove a liquidator for apparent bias.

The degree of independence required of a liquidator

  1. It is common ground that a liquidator can be removed for actual or apprehended bias and that the test for apprehended bias is broadly same as that applied in relation to judges and administrative decision-makers. In relation to judges, the position is that a judge is disqualified if:[2]

Applying this to the present case, a liquidator will be disqualified if a fair-minded person connected with the liquidation would have a reasonable apprehension of lack of impartiality on the part of the liquidator. Such apprehension might arise where there is a prior association between the liquidator and others with a stake in the liquidation such as a director of the company.

  1. Liquidators are not judges and the law must recognise the commercial context in which insolvency practitioners operate and the professional connections that they can be expected to have. This was well explained by White J in Australian Securities and Investments Commission v Franklin:[3]

The proceedings before the Supreme Court

  1. CML sought removal of Mr Petterson within its existing, but stayed, proceedings against Progressive This involved:
  2. In February 2022, CML sought to add Mr Drake as a defendant to the proceedings to face a claim under s 71 of the Act. As far as we can tell, this application was never determined. In December 2022 it was rendered redundant by CML issuing separate proceedings against Mr Drake under s 71.

Mr Petterson’s connections with Mr and Mrs Drake and their family prior to September 2021

Overview

  1. Mr Petterson and Mr Drake have known each other since the late 1980s. Their relationship has been professional as have relationships between Mr Petterson and Mr Drake’s children, Ms Kruse and Mr Justin Drake. One feature of the relationship between Messrs Petterson and Drake requires discussion as does Mr Petterson’s business connections with Ms Kruse and Justin Drake.

“Re-domiciling” of companies associated with the Drake family

  1. Mr Drake controlled a number of companies that had been formed in Mauritius. For reasons associated with the comparative costs of operating companies in Mauritius and the Marshall Islands, he decided to “re-domicile”, as he put it, those companies in the Marshall Islands. “Re-domicile” is a misnomer. This is because what was involved was setting up companies in the Marshall Islands with names that were the same as, or similar to, those of the relevant Mauritius companies and transferring the assets of the Mauritius companies to the new Marshall Islands companies.
  2. Those exercises were carried out in 2015. Mr Petterson’s role was that he became a director of the Mauritius companies and took responsibility for transferring their assets to the corresponding newly established Marshall Islands companies.
  3. One of the Mauritius companies of which Mr Petterson became a director was Paco Holdings, to which we will refer as Paco (Mauritius). The shares in this company were beneficially held by the Tiapapata Trust, a family trust for the Drake family. Mr Petterson implemented the transfer of the assets of Paco (Mauritius) to a new company of the same name in the Marshall Islands. This was the company to which we have referred as Paco (MI). As we have noted, this company is now the ultimate shareholder in the chain of ownership in relation to Progressive.
  4. Paco (MI) paid WST2.6 million to the reinsurers of Progressive to meet obligations of Progressive. These payments appear to have been arranged by Mr Justin Drake. In this respect he was referred to by Mr Murray Drake as being the person who “looks after our affairs”.
  5. Two other relevant Marshall Islands companies are Decatur and Evora Corporation. On Mr Drake’s evidence, Mr Petterson’s roles in relation to the similarly named Mauritius companies was the same as it was in respect of Paco (Mauritius). Decatur and Evora are of some significance because:

Mr Petterson’s connections with Mr and Mrs Drake’s children

  1. Paco Holdings Ltd (Paco (NZ)) was incorporated in New Zealand in June 2015. Its registered address is Mr Petterson’s office and he has been a director from the outset. His co-director is Ms Kruse. The only shareholder is Justin Drake. It is an investment company.

Mr Petterson’s acceptance of office as liquidator and conduct of the liquidation

Basis of acceptance of appointment

  1. Mr Petterson’s evidence is that payment of his fees and expenses will come only from the assets of Progressive that he can realise. Progressive had limited realisable assets when it was placed in liquidation (on our assessment, approximately WST52,000). These assets were not sufficient to fund a liquidation of any complexity.
  2. The evidence indicates that prior to Mr Peterson accepting appointment as liquidator he had received an explanation from Mr Drake of Progressive’s difficulties which extended to an acknowledgement that Progressive had not been able to meet a deferred payment arrangement.[6] Insurance companies do not customarily require deferred payment arrangements to meet their liabilities. The existence of the arrangement and Progressive’s inability to honour it were strong indications (to say the least) that Progressive had been trading while insolvent. This meant that its liquidation was almost inevitably going to be complex and likely to involve adverse scrutiny of the conduct of his long-time associate Mr Drake. Mr Petterson must have known all of this. However, he has given no explanation that addresses squarely why he took on the role of liquidator despite it being likely to be both commercially unremunerative and professionally and personally challenging.

Mr Petterson retaining Ms Kruse (and thus her partners, Mr and Mrs Drake)

  1. Mr Petterson retained Ms Kruse to act as his solicitor in relation to the dispute over his appointment as liquidator. As noted, Ms Kruse and her parents practise in partnership. So, the retainer was not confined to Ms Kruse but extended to Mr Drake’s law firm.

The records and computers of Progressive

  1. Progressive carried on business from premises adjacent to the offices of Drake & Co. Since the liquidation, Mr Drake has been in de facto control of those premises and thus of the records and computers of Progressive. Mr Petterson had been content to allow that situation to continue although we note that he has taken cloned copies of the hard-drives of the computers.

Initial engagement with CML’s solicitors

  1. On 21 September 2021, CML’s solicitors wrote to Mr Petterson challenging his appointment as liquidator. The letter requested Mr Petterson to convene a meeting of creditors. Enclosed with the letter was a proof of debt, for a total of WST5.9 million, made up of:
  2. Mr Petterson’s response of 22 September 2021 was along the following lines:
  3. Mr Petterson was not entitled to require a deposit of WST10,000 as a pre-requisite to calling a meeting of creditors.[7] His failure to call a meeting was in breach of his statutory duties.

Mr Peterson’s memorandum to the Court of 24 September 2021.

  1. In a memorandum filed with the Court on 24 September 2021, Mr Petterson said:
  2. That Mr Petterson had helped Mr Drake move assets from Mauritius to the Marshall Islands was not made explicit. Presumably Mr Petterson saw it as encompassed in the phrase “professional dealings” in the first of the two emphasised passages. Nor was the “shareholder representative” referred to in the second of the passages identified. It is difficult to see how this could have been anyone other than Mr Drake. If so, this raises at least a question mark over the phrasing of that second passage.

Mr Petterson’s first report to creditors

  1. Three aspects of Mr Petterson’s first report to creditors of 4 October 2021 warrant mention:

Rejection of the claim for WST1 million

  1. On 15 October 2021, Mr Petterson rejected the claim for WST1 million for costs incurred by CML as a result of Progressive not meeting its financial obligations. He said that the contractual arrangements between CML and Progressive did not provide for such liability. He then went on to say this:

It is true that the contractual arrangements between Progressive and CML did not provide for Progressive to pay interest. But this did not mean that the claim was without merit. Although it once was a rule of the common law that damages are not available for non-payment of money owed, that is no longer the case.[8] On the basis of the material before us, CML has, at the very least, an arguable case for recovery of damages for non-payment of the money that Progressive had promised to pay. So, the comment that the claim was “specious” was not only offensive but also wrong.

Mr Petterson’s affidavit of 11 November 2021

  1. This was Mr Petterson’s first affidavit in the proceedings.
  2. The only aspect of this affidavit that warrants mention is that Mr Petterson said that (a) Mr Drake had provided evidence to show that he had paid direct to “the underwriters” WST2.6m to meet obligations of Progressive; and (b) Mr Drake would be able set-off that amount against any claim against him for his conduct as a director. This is plainly a reference to the payments by Paco (MI) to which we have referred.
  3. Mr Petterson did not explain why these payments should be treated as having been made by Mr Drake (for instance by way of reference to contemporaneous documents). As well, assuming that the payments were made on behalf of Mr Drake so as to create a debt owed by Progressive to him, rather than Paco (MI), it is far from clear that they could be set off against liability for losses caused by Mr Drake’s conduct as a director. There could be no such set-off in relation to any liability Mr Drake might have directly to creditors under s 71 of the Act. And in relation to any liability Mr Drake might have to Progressive under ss 65 and 70 of the Act, there could be no right of set-off in relation to payments made within two years of liquidation.[9] Further, there may well be other issues in relation to set-off in respect of any payments made earlier than that (that is, before 9 September 2019).

Mr Petterson’s report to the Court

  1. An undated report was attached to an affidavit of Mr Petterson of 25 April 2022.
  2. The report provides a detailed analysis of the reasons for the failure of Progressive. Mr Petterson noted that the last set of financial statements for Progressive were for the year ending 30 June 2012. However, he attributed little significance to the absence of financial statements for subsequent years. He discussed at length liabilities of Progressive to the reinsurer dating back to 2011 that were not fully quantified until the first of the payments to CML was approved by the reinsurer in March 2017. At this point, the reinsurer deducted approximately WST1 million from what would otherwise have been a payment of WST1.5 million. As to this, he concluded that there was “insufficient evidence” that Mr Drake knew of the extent of the liability to the reinsurers. He put the point of insolvency as being February 2018 (when Progressive was not able to continue progress payments to CML) and concluded that Progressive should have stopped trading then or shortly afterwards. However, he said that the creditors (viewed as a whole) had not suffered loss by reason of the wrongful trading. This is because, on his assessment, the overall financial position of the company did not deteriorate between February 2018 and September 2021.
  3. The report discussed the extent of the debt owing to CML. It will be recalled that Mr Petterson had already rejected the expenses claim for WST1 million.[10] That left on the table the WST4.9 million claimed as the unpaid balance of what Progressive had agreed to pay. There is a comparatively minor inconsistency between the records of CML and Progressive as to exactly how much had been paid. But in this report, Mr Petterson raised another and far more significant issue. He contended that in 2019 and 2020 CML had renewed its insurance arrangements with Progressive but had not paid the premiums (totalling WST2.2 million) and that Progressive was therefore entitled to offset that WST 2.2 million against its liability to CML. We will discuss the substance of this contention shortly.

Correspondence of 13 and 17 June 2022

  1. On 13 June 2002 Russell McVeagh, now acting for CML, wrote to the New Zealand and Samoan solicitors acting for Mr Petterson. The letter raised a number of issues. Some of these were addressed to the direct and indirect ownership of Progressive and whether Mr Petterson was disqualified under cl 1 of Schedule 14 of the Act. Amongst the issues identified was why Evora’s address in the Companies Office file for Chandra was Mr Petterson’s office. As well, the letter raised more general concerns as to Mr Petterson’s relationship with Mr Drake. Then, under the heading, “request for information” the letter asked a number of questions, including why Mr Petterson had thought it appropriate to retain Drake & Co to act as his solicitors.
  2. Mr Gustafson, by now acting on behalf of Mr Petterson, replied to Russell McVeagh on 17 June 2022. In his reply, he addressed directly the alleged disqualification stating accurately that Mr Petterson had never been a director of Paco (MI) or Decatur. Mr Gustafson’s letter did not discuss Mr Petterson’s roles as a director of the similarly named Mauritius companies. As well, he did not explain why Mr Petterson’s office had been listed as Evora’s address in the Companies Office records of Chandra. Notably absent from the letter was specific engagement with the questions asked in the Russell McVeagh letter. Instead, there was a general denial of bias.
  3. In argument before us, Mr Gustafson sought to defend the lack of engagement with the questions raised by Russell McVeagh on the basis that, at that time, CML’s application had not identified lack of independence as a ground for removal. While that is true, the assertion in his letter that Mr Petterson was not biased is itself an acknowledgement that Mr Petterson’s independence was in issue. It was perfectly apparent that CML was deeply suspicious of Mr Petterson’s connections with Mr Drake. The assertion that he was not appropriately independent was very much on the table. In that context, Mr Petterson’s non-answering of what we see as legitimate questions asked of him by Russell McVeagh could be expected to deepen the suspicions held by CML.

Mr Meltzer’s affidavit of 27 June 2022

  1. Mr Jeffrey Meltzer was an expert witness who gave evidence for CML. In an affidavit of 27 June 2022 he heavily criticised Mr Petterson’s (a) selection in his report to the Court of February 2018 as the time when Progressive became insolvent; (b) non-calling of a meeting of creditors as requested by CML; (c) assertion (in his November 2021 affidavit) that the WST2.6 million paid by Paco (MI) to the reinsurer could be offset against any liability that Mr Drake had for wrongful trading; (d) minimising the significance of non-completion of financial statements after 2012; and (e) assessment of the consequences of the wrongful trading after February 2018. Of the report to the Court (April 2022), Mr Meltzer said:

Mr Petterson’s second report to the creditors

  1. This report is dated 30 June 2022.
  2. In this report Mr Petterson assessed that Progressive was insolvent (in that its liabilities exceeded its assets) prior to 30 June 2010. He concluded that it was unable to pay its debts as they fell due by, at the latest, 30 June 2011. He said that all who served as directors from that time, including Mr Drake and Mr Chan Mow, could be sued for wrongful trading. His assessment of the loss associated with that wrongful trading was WST208,000. He also made it clear that individual creditors could directly sue directors under s 71 of the Act.
  3. The report is comprehensive and deals with a number of other issues, such as failures of regulatory supervision. More generally, the report shows that Mr Petterson is an experienced and capable insolvency practitioner.
  4. This report was front and centre in Mr Gustafson’s submissions before us. Mr Gustafson’s position was that suspicions as to Mr Petterson’s impartiality should be seen as having been entirely allayed by this report. We will come back to assess this argument later. For the moment, it is sufficient to note aspects of the report that detract somewhat from Mr Gustafson’s submission.
  5. The first is a tendentious passage in the report in which Mr Petterson blamed Mr Chan Mow for the losses suffered by Progressive arising out of the CML claim:
  6. The second is the way Mr Petterson dealt with the debt owed to Progressive by CML. He rejected the debt in its entirety. This was on the basis that although he would accept a proof of debt for WST2.6 million, this was not the amount CML had claimed.[11] He then went to say that if a proof of debt had been lodged for WST2.6 million, he would have “relegated” that claim behind those of other creditors. Mr Petterson has subsequently been unable to point to a legal basis for the postulated relegation.
  7. Mr Petterson outlined a voidable preference claim he proposed to take against CML. This was in relation to the premiums issue we have already discussed.[12] One of the alleged premiums in issue (amounting to $569,407) had been debited to CML in the books of Progressive in July 2020 (and thus within the “specified period”). The voidable preference claim Mr Petterson signalled relied on cl 2 of Schedule 17 to the Act. The claim was outlined in this way:

This was loosely expressed. It did not make sense to suggest that Progressive paid a premium on behalf of CML. Rather, Mr Petterson’s contention as later developed was that (a) CML entered into insurance policies (by way of renewal) with Progressive; (b) the agreed premium was $556,407.10; (c) this premium was off-set against Progressive’s debt to CML; and (d) in this way CML had received a benefit (in the form of insurance cover) that was a voidable preference. Indeed, Mr Peterson subsequently (on 18 October 2022) filed a voidable transaction notice formulated in that way.

  1. We have some reservations about the logic of the thinking associated with this claim. Even on the assumption that Mr Petterson could prove the contentions noted as (a), (b) and (c) in the preceding paragraph, the so-called benefit received by CML was confined to insurance cover with a hopelessly insolvent insurance company. Unexplained in any of the material we have seen is why worthless insurance cover should be treated as a sufficient benefit for CML to mean that it received “more in satisfaction of its debt” than it “would otherwise have received”, so as to be properly the subject of a voidable preference claim. As well, as we will now explain, the claim that CMIL renewed its insurance policies with Progressive is extremely doubtful.

Did CML incur liabilities to Progressive for insurance premiums between 2019 and 2021?

  1. At this point it is appropriate to assess Mr Petterson’s contention that CML had renewed its insurance policies with Progressive in 2019 and 2020. As will be appreciated, this was the premise for (a) his assessment that the debt to CML should include an offset for WST2.2 million for premiums and (b) his voidable preference claim in relation to the premiums that he said became payable in July 2020.
  2. Mr Petterson’s analysis of the correspondence between CML and Progressive as to the alleged renewals did not refer to a letter of 31 July 2019 from CML to Progressive. In that letter, CML sought proof, in the form of written confirmation from the reinsurer, that “we were covered for last and current periods”. The letter went on:

The evidence is that confirmations sought by CML were never provided.

  1. On the basis of the evidence just referred to, the arguments advanced by Mr Petterson and his voidable preference claim appear to be unsound.

The hearing in the Supreme Court

  1. The evidence was heard between 28 November and 1 December 2022. The case was then adjourned until 18 January 2023 for the hearing of submissions.
  2. There is no need for us to review in detail the evidence as it largely addressed facts that we have already discussed. That said, some aspects of the evidence warrant mention.
  3. A number of creditors of Progressive gave evidence of concerns about Mr Petterson’s independence. This evidence was challenged in cross-examination and extensively in the written submissions made by Mr Gustafson to us. However, we do not propose to engage with this aspect of the case. This is because the test for apprehended bias is objective.
  4. The expert witnesses called by CML (Mr Melzer and Mr Oloipolo Beetham) had not addressed in their affidavits Mr Petterson’s June 2022 report. When cross-examined on it, neither of them took particular issue with its contents.
  5. When Mr Petterson was cross-examined on his role in relation to Paco (Mauritius), he was not particularly forthcoming. He referred to secrecy requirements that apply in relation to transactions in tax havens. He claimed he could not recall what assets he had transferred. He said that in accordance with usual practice when dealing with tax havens, he had destroyed all relevant records. It is, however, at least likely that those assets were reasonably substantial. We say this because, as will be recalled, Paco (MI) was later able to pay WST2.6 million on behalf of Progressive’s reinsurer.
  6. When challenged on why he had not, in his April 2022 report to the Court, discussed the possibility of a claim under s 65 of the Act against Mr Drake, Mr Petterson said that it was because he considered that Mr Drake was “not worth powder and shot”.

The approach of the Chief Justice to the independence issue

  1. Having satisfied himself that he had the power to make the orders sought, the Chief Justice referred to the test for apprehended bias in very much the same way as we have outlined.
  2. The critical part of his judgment is as follows:

The arguments advanced on behalf of Mr Petterson

  1. In his submissions, Mr Gustafson reviewed many authorities that deal with the removal of liquidators. He said that the general principles that come from these authorities are that:
  2. In challenging Chief Justice’s overall findings of fact, Mr Gustafson discussed in some detail the way in which the Chief Justice dealt with the evidence of creditors other than CML. For reasons already given, we do not see this evidence as material. He also alleged that the Chief Justice had misunderstood:
  3. In both his written and particularly his oral submissions, Mr Gustafson relied heavily on the 22 June 2022 report. He noted that the expert witnesses called by CML largely accepted that the 22 June 2022 report had addressed their earlier concerns and had not pointed out any particular errors in it.
  4. He also maintained that at the stage in the process, there was no utility in removing Mr Petterson.

Our approach

  1. As to the alleged errors of fact made by the Chief Justice, we see no material mistake.
  2. We agree with Mr Gustafson that there must be good reason to remove a liquidator. However, statements to that effect in prior decisions must be assessed in the context of the facts that the judges were dealing with. As to this, we see considerable sense in the following remarks made by the then Neuberger J in AMP Music Box Enterprises Ltd v Hoffman:[15]

It was the second of the paragraphs just cited that Mr Gustafson relied on in support of his argument as to the caution that courts should show before removing a liquidator. As it happens, we see the first as being rather more apposite

  1. We have earlier set out what we see as the relevant facts in relation to (a) Mr Petterson’s association with Mr Drake and his family; and (b) his conduct of the liquidation and litigation.
  2. The relationship between Messrs Drake and Petterson was, in a sense, professional. It did, however involve a high degree of trust, sufficient to result in Mr Drake involving Mr Petterson in the shifting of assets from one secrecy-respecting offshore financial centre to another. We have a sense that Messrs Drake and Petterson saw engagement in business activities in such jurisdictions as a normal incident of professional lives. For them, it probably was, as both have had business or professional engagements with offshore financial centres. However, we doubt if this is the way a reasonably-minded creditor of CML would see it. The likely concerns of such a creditor would have been exacerbated by the evidence Mr Petterson gave as to this – about the constraints imposed by tax haven secrecy legislation, his inability to recall the assets that were transferred and his destruction of all relevant records. Such a creditor might wonder whether this was material to whether Mr Drake was worth suing. It will be recalled that Mr Petterson in evidence had offered the assessment that Mr Drake was not worth powder and shot. A reasonably-minded creditor might think that Mr Petterson should not have offered or relied on such an assessment unless willing and able to be transparent as to what he knew of Mr Drake’s affairs.
  3. Mr Petterson had had a long, and we assume friendly, association with Mr Drake. Prior to accepting appointment as liquidator, Mr Petterson would have recognised that Mr Drake was vulnerable to legal action in relation to his actions and inaction as a director of Progressive. The liquidation of Progressive was likely to be complex, contentious and personally difficult, as he must have realised. But there were very limited funds on hand, far less than would be required to fund investigations of the kind that were warranted. All in all, we see no obvious rationale for Mr Petterson to have accepted appointment.
  4. Leaving all of Progressive’s computers and records in the de facto possession of Mr Drake was odd. So too was retaining Mr Drake’s firm as his solicitors. When challenged by Russell McVeigh to explain why, Mr Petterson chose not to engage.
  5. Mr Petterson was not open about his associations with Mr Drake and his family. These associations were not mentioned in the reports to creditors. Mr Petterson’s memorandum to the Court of 24 September 2021 was less than open. When challenged over his suspected involvement in the shareholding structure of Progressive, his responses, while accurate as to his denials of involvement with the Marshall Islands companies, were not illuminating.
  6. Mr Petterson, as liquidator, was in fiduciary position in relation to the company. CML had a substantial stake in the company as a major creditor. “Boxing clever” was not an appropriate strategy.
  7. At times Mr Petterson acted in ways that a reasonably-minded observer would be likely to think showed animus against CML and a favouring of Mr Drake’s interests.
  8. As for Mr Gustafson’s reliance on Mr Petterson’s June 2022 report, we make the following points:
  9. We have gone through the actions of Mr Petterson in some detail, highlighting a number of occasions when his approach was to the disadvantage of CML and/or the advantage of Mr Drake.
  10. Individually, some of these may seem to be of limited moment. For instance, we accept that other liquidators may have rejected CML’s WST1 million claim for expenses associated with Progressive’s non-payment of what it owed (albeit in language less offensive than that used by Mr Petterson). He may be forgiven for not being fully familiar with the Act and thus his obligation to call a creditors meeting when asked to do so by CML (albeit that even so, it was perhaps a little surprising that he did not call a meeting). His overlooking, or not finding, the letter of 31 July 2019 that undermines the voidable preference claim against CML, on its own, would have only limited significance. That said, some of the actions to which we have referred are less easy to explain away. The ones we have in mind will be apparent from what we have already said. But more significantly, what is primarily important is the totality of his actions and the reality that the errors and questionable assessments all go one way, to the disadvantage of CML and the advantage of Mr Drake
  11. Mr Petterson should not have accepted as appointment as liquidator and, having done so, should have resigned when first challenged by CML. His errors of judgement in taking office and not resigning were substantially compounded by the way he conducted the liquidation and defended the application for his removal. In complete agreement with the Chief Justice, we conclude that Mr Petterson’s associations with Mr Drake and his family and his conduct of the liquidation and litigation provide a substantial basis for a reasonable apprehension of bias.
  12. Mr Gustafson argued that there was no point in removing Mr Petterson as the liquidation is largely complete and dissatisfied creditors have direct rights of action under s 71. We disagree. We are doubtful whether apparent lack of utility is ever going to be a particularly cogent reason for not removing a liquidator on grounds of apprehended (or actual) bias. In any event, we are not persuaded that there is no utility. The liquidator has statutory powers and stands in the shoes of the company; something that creditors suing under s 71 do not. There are as well other areas of inquiry that may warrant pursuit; by way of examples, as to (a) fees paid to Drake & Co before liquidation for which voidable preference proceedings might be appropriate and (b) how Progressive dealt with regulatory authorities. Furthermore, the way in which the liquidation has been conducted means that the possibility of significant “unknown unknowns” – that is issues that we do not currently know about but which may become apparent after full inquiry – is such that the utility argument advanced by Mr Gustafson must fail.
  13. For the sake of completeness, we note that arguments were advanced in writing by Mr Gustafson to the effect that the qualifications of the replacement liquidators had not been appropriately proved. This was not pressed in oral argument and rightly so.

Disposition

  1. The appeal is dismissed. We reserve leave to apply as to the basis on which costs should be assessed and if necessary, quantum and any other ancillary issue that may arise.

JUSTICE FISHER
JUSTICE BLANCHARD
JUSTICE YOUNG

[1] See Yan v Mainzeal Property and Construction Ltd (in liquidation) [2023] NZSC 113 (Supreme Court of New Zealand).

[2] Saxmere Co Ltd v Wool Board Disestablishment Co Ltd [2009] NZSC 72; [2010] 1 NZLR 35 at [3] (Supreme Court of New Zealand). The test turns on a possibility of bias that is “real and not remote” rather than a probability, see [4].

[3] Australian Securities and Investments Commission v Franklin (2014) 233 FCR 204 at 219 (Federal Court of Australia).

[4] Section 218 of the Act confers jurisdiction on the court to appoint interim liquidators where an application seeking liquidation is before the Court. As Progressive was already in liquidation, s 218 was not engaged. Mr Petterson contended that this meant that the Court did not have power to make the order CML sought as to interim liquidators. This was a pretty technical argument as it was clear that CML was not relying on s 218. We think it well-arguable that in the context of an existing liquidation the Court can remove a liquidator and appoint other liquidators on an interim basis pending further order of the court. This is basically what CML was seeking.

[5] The issue as to lack of independence was expressed in a rather awkward way. But the amended notice of motion made it clear that lack of independence was in issue.

[6] See below, at [48].

[7] See ss 238(1)(b) and 244(1)(c) of the Act.

[8] See for instance, Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125 (High Court of Australia); Sempra Metals Ltd (formally Metallgesellschaft Ltd) v Commissioners of Inland Revenue [2007] UKHL 34; [2007] 3 WLR 354 (House of Lords); and Clarkson v Whangamata Metal Supplies Ltd [2007] NZCA 590; [2008] 3 NZLR 31 (New Zealand Court of Appeal).

[9] See cl 22 of Schedule 18 of the Act. Because Mr Drake was a “related person” in respect of Progressive, he cannot claim a set-off in relation to any transaction with Progressive within two years of liquidation unless able to show that he did not have reason to believe that Progressive was unable to pay its debts as they fell due. He would not be able to show that.

[10] See [18], above.0

[11] It will be recalled that he had earlier rejected the proof of debt as to WST1 million. So, his assessment that WST2.6 million was owing was in relation to the WST4.9 million CML had claimed in relation to the unpaid balance of what Progressive was required to pay under the settlement agreements.

[12] See above at [57].

[13] Amongst the cases he cited was AMP Music Box Enterprises Ltd v Hoffman [2002] BCC 996 (High Court of England and Wales, Chancery Division). This case is discussed further at [86], below.

[14] An illustrative case relied on by Mr Gustafson is Re Biposo Pty Ltd (1995) 17 ASCR 730 (Supreme Court of New South Wales).

[15] AMP Box Enterprise Ltd v Hoffman, fn 13 above at 1001.

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